IRS Interim Guidance on Qualified Production Property (Notice 2026-16)

What the New QPP Update Means for Capital-Intensive Businesses

On February 20th, the Treasury Department and IRS released long-awaited interim guidance addressing the special depreciation allowance for Qualified Production Property (QPP) under the One Big Beautiful Bill Act (OBBBA). The update, issued through Notice 2026-16, provides definitions, election mechanics, and reliance rules while formal proposed regulations are being developed.

For taxpayers planning manufacturing or production facility investments, this guidance begins to answer the key question many have had since the law passed: What qualified for the QPP deduction?

To provide clarity on the impacts of this new guidance, let’s walk through what matters most right now.

Quick refresher: What is Qualified Production Property?

The OBBBA introduced a new depreciation framework under IRC §168(n), allowing taxpayers to elect up to 100% first-year depreciation on certain production-related facilities.

In general:

• QPP is nonresidential real property
• It must be used as an integral part of a qualified production activity
• A qualified production activity includes manufacturing, agricultural production, refining, or chemical production that substantially transforms tangible products

The incentive was designed to accelerate domestic investment by allowing facilities that would traditionally be depreciated over 39 years to be expensed much more quickly, significantly improving project cash-flow economics.

What Notice 2026-16 Actually Adds

1. Definitions taxpayers can rely on now…

The notice provides interim definitions for:

• Qualified production property
• Qualified production activity
• Rules for determining the amount of the special depreciation allowance
• When and how the election must be made

Taxpayers may rely on these rules until formal proposed regulations are issued. This reliance language is important—it effectively gives advisors a usable framework today rather than forcing projects to wait for final regulations.

2. Clarification on timing eligibility…

The special depreciation allowance generally applies only if the property is:

• Placed in service after July 4, 2025, and
• Before January 1, 2031

This window aligns with the broader statutory framework encouraging near-term domestic production investment while still providing a multi-year planning horizon.

3. Election mechanics now addressed…

A critical practical question since enactment has been how taxpayers formally elect QPP treatment.

Notice 2026-16 outlines:

• The procedure for making the QPP election
• How to compute the allowable deduction
• Coordination with depreciation rules
• How recapture rules apply if the property later ceases to qualify

That last point is particularly important for facilities that may change operational use, ownership structure, or production scope after being placed in service.

Why this Guidance Matters for CPAs and Advisors

Notice 2026-16 turns a theoretical incentive into a usable planning tool. Until now, QPP has largely been a statutory opportunity lacking operational clarity. Many firms understood the benefit but lacked enough guidance to confidently model projects or advise clients on elections. This notice begins to close that gap and reinforces the strategic role of facility-level tax planning.

QPP is fundamentally different from traditional bonus depreciation:

• Bonus depreciation generally targets equipment and shorter-life assets
• QPP focuses on buildings and production facilities themselves

That means the tax savings may be tied directly to:

• Facility design decisions
• Construction timing
• Ownership vs. lease structures
• How production activities are documented and substantiated

Because eligibility depends on the property being integral to qualifying production activity, operational alignment matters just as much as tax classification.

The Notice Clarifies Self Rental Restrictions

The notice clarifies one of the critical issues after the law:

Is QPP limited for self-rental?

Under the law, property in which the taxpayer is a lessor, property used by a lessee, does not qualify for this deduction. This new guidance gives some exceptions to this requirement:

• Exception for consolidated groups
• Exception for commonly controlled pass-through entities

This provides a critical distinction for many small businesses. Most small businesses hold their real estate in separate entities; this clarification regarding self-rental exceptions means many more small businesses will have access to the benefits of the QPP deduction.

What Parts of a Facility Qualify

A key prior question was what parts of a facility qualify for the deduction. This guidance is more liberal than expected. Critical aspects include:

• Only real property qualifies; personal property must be separated out
• 95% safe harbor to take substantially all of the facility
• Inclusion of some raw materials storage
• Ability to use a “reasonable method” to allocate property

The ability to use a “reasonable method” leaves a significant amount up to interpretation. The IRS states that a cost segregation study or other analysis can be utilized. This makes the allocation on a cost segregation even more valuable.

Practical Takeaways for CPAs and Business Owners

For businesses considering new or expanded production facilities, planning becomes more critical. To ensure maximum tax savings, strategies need to be discussed at the beginning of a project. Some critical planning questions include:

1. How to ensure deductions are not locked up in passive activities?
2. How much of a deduction to utilize under QPP?
3. How to design the facility to maximize opportunities?
4. How to plan around other strategies, including state and local incentives, R&D Tax Credits, and state depreciation laws?

The QPP provision represents one of the most powerful facility-level tax incentives introduced in years—but like most powerful incentives, it requires intentional planning to fully realize. McGuire Sponsel will continue to provide updates as released by the IRS.